Debt

Public debt in the G-7 nations of the United States, Britain, France, Canada, Germany, Japan, and Italy is expected to be over 119% of their combined GDP in 2014.

That, if you are unfamiliar with the concept, is a stunning figure.

Imagine owning a business with gross revenues of $1 million, outstanding debts of $1.19 million, and cash flow from your business to service the debt of about 5% of gross revenues.

This means your company has only $50,000 per year to service the outstanding debt.

If the average interest rate on your company’s debt is 5%, the debt load on your company would be increasing your debt each year. Your repayment of $50,000 would be less than your interest expense about $59,500.

Imagine further that you forgo using the cash from your business for debt payment, and choose to borrow more to keep your debt payments current. Bankruptcy would seem to be only a matter of time for your company.

At some point, finding lenders will be difficult and you would be forced to find funding at significantly higher interest rate levels.

There is absolutely no mystery as to what's coming in the years ahead. And as interest rates rise for sovereign debt, rates will rise for home mortgages.

With that in mind, consider this chart...

$700 a month more in payments at only 5.25%.

That will almost break many who bought the maximum they could afford in the Lower Mainland in the last two years.

A rate of 8% will absolutely push them to bankruptcy.

As always, it's very simple. If rates stay low there will be no bursting of the bubble. If rates go up, the bubble will burst. If rates go up significantly, the world's largest housing bubble will burst in spectacular fashion.

And since the debt situation of the western world virtually guarentees a future of significant rate increases, I maintain my prediction of a minimum of a 40-50% drop in the price of a single family home on the wet coast.

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Rules can be bent

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Is this the start?: Federal Reserve Raises discount rate from .50% to .75% (posted 18:27 PST)

How effective will the new mortgage rule changes instituted by Finance Minister Jim Flaherty this week be?

Well... when you consider that, under the old rules, the mandatory 5% downpayment was openly flaunted by banks who advertised on their websites that they would give you 5% back for taking out the mortgage with them (thus eliminating the 5% down requirement); what do you think?

Me too.

And the media is openly telling buyers, "Don't worry, home loan rules can still be bent."

"It's not a huge deal," said Benjamin Tal, a senior economist with CIBC World Markets. "It was a balancing act for the government, which wants to be seen as responding to the mortgage market but not derailing it."

Ah yes... the government wants to be 'seen as responding'. Image is everything.

The real-estate industry was clearly worried about the possibility of down payments rising to 10% and amortization shrinking to 25 years. That would have had an impact. But these changes? Pfffft.

As the Vancouver Sun notes, "one financial institution was still advertising last week its offer to pay the 5% minimum down payment on your behalf... the banks will also let you tack on your mortgage insurance costs on top of your loan, meaning you can get a mortgage for almost 98% of the value of your property."

Nothing has changed. And if you need a little more income than you did last week to qualify for that loan, have no fear - I can almost guarantee there will be strategies coming out to let you deal with that.

A little deja-vu circa USA in 2006?

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For those who enjoy the pics I have posted on the Olympics, you can see more updates on this sub-site I have created. All future photo updates will be uploaded on this sub-site.

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PIIGS, Dubai, America and Debt

As the world watched the markets melt down in 2008, I commented constantly that what we were experiencing was a deep, financial earthquake the repercussions of which we do not fully appreciate or understand.

I maintain that viewpoint even today.

The chain of events set into motion in 2008 still have a long way to play out.

I have posted here numerous times before about the massive amount of private debt that has accumulated and how the system needs to allow this debt to unwind, no matter how painful this process will be (and it will be painful).

We cannot have meaningful recovery until this happens.

But Western governments have not allowed this to happen. They have intervened to prevent the pain. And no region has been shielded more than Canada, in general, and Vancouver, in particular.

Emergency interest rates and stimulus spending have been the most visible signs of this intervention.

But we are only delaying the reckoning.

And as the months go by, the shenanigans are exposing themselves.

Subprime mortgages in the United States were only a small tip of the iceberg, the first element to fall. Now the problem has spread to all areas of the housing market.

Investments built on that sham of the real estate bubble have crumbled all over the world, and in turn have crippled industry after industry.

In Europe, we are now coming to understand how Goldman Sachs Group Inc. (through it's management of $15 billion of bond sales for Greece) arranged a currency swap that allowed the Greek government to hide the extent of its deficit. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days. Greece’s vast deficits caused it to fail the criteria for joining the single European currency in 1999, but it succeeded in 2001. With this manipulation by Goldman Sachs, Greece was able to gain entry into the European Union.

Now as debt caves in on itself, the situations in Greece, Ireland, Italy, Spain and Portugal are wrecking havoc.

Then there is Dubai. Temporary fixes have created some breathing room but clear warnings are coming out that time is running out for the country to restructure its debt and pull itself out of economic danger.

But nowhere is the mountain of debt more worrisome than in the United States.

"It keeps me awake at night, looking at all that red ink," said President Obama in Nashua, N.H., on Feb. 2. "Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities."

Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country's entire economic output, or gross domestic product.

Even more alarming, experts say, is that those figures will climb to an unprecedented 200% of GDP by 2038 without a dramatic shift in course.

Keep in mind that the European countries are threatened by this very debt to GDP ratio. On a vulnerability index, the United States ranks 9th.

But what is looming in the coming months is going to place the United States in the same cross hairs currently confronted by the PIIGS and Dubai.

Symptoms of the looming problem can be seen in rising homelessness in rural and suburban America that is becoming so bad it is straining shelters, all the result of a perfect storm of foreclosures, unemployment and a shortage of affordable housing.

40 of America's states are in deep financial trouble. But none more so than California.

California's situation has been compared in relation to the United States what Greece is to Europe. But that downplays the significance.

Were it a country, the state's economy would rank eighth in the world - roughly the size of France and much larger than any of the so-called PIIGS. Portugal' economy is ranked 50th in the world, Ireland's is 56th, Italy's is 11th, Greece's is 34th and Spain's is ranked 13th.

Mighty California is drowning in debt. And it has shown itself incapable of managing its finances in recent years. It's now facing a $20-billion (U.S.) budget shortfall in the current fiscal year, and another big gap in 2011. Even with brutal planned cuts to government services and dramatic tax hikes, Republican Governor Arnold Schwarzenegger has asked for nearly $7-billion from Washington to fill the gap - a sum he is unlikely to get.

The shortfall equals a whopping 22% of the state's GDP. That compares with a projected 10.6% of GDP this year for the U.S. federal government's record deficit.

California can borrow money to build roads, schools and other capital projects that the State needs to fund, but it currently has $94-billion worth of bonds outstanding. And the ongoing expenses of government - education, health care, policing, jails, social services and the like - must be paid for out of this year's revenue.

When you combine the fact that more than 40 US states are headed for shortfalls, you start to get a sense of the looming crisis.

Those states cumulatively have a record $194-billion hole to fill, equal to 28% of total state budgets. And it's forecast that there will be another $180-billion gap in 2011.

The inescapable truth is that the mounting toll of unmet state obligations - more than $350-billion in 2010 and 2011 - compounds the debt threat facing the United States. Foreign investors, who help finance all that borrowing, will not much care who the debt actually belongs to.

We are now entering a time where the big players in the market are shorting the debt of soverign countries just like they did with the financial companies. Money is being made by taking countries down, all without a single shot being fired. How long before this mania turns to America?

The US government is either going to have to print money (and actually stick it into circulation - thus triggering hyper inflation) or the cost of borrowing money is going to skyrocket as hundreds or Sovereign nations, states, provinces and municipal governments pursue a limited supply of money.

We've lived through a 12 year period of historically low interest rates. That era is coming to an end. And it's not all that hard to see why.

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For those who enjoy the pics I have posted on the Olympics, you can see more updates on this sub-site I have created. All future photo updates will be uploaded on this sub-site.

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Olympic pics...

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For those who enjoy the pics I have posted on the Olympics, you can see more updates on this sub-site I have created. All future photo updates will be uploaded on this sub-site.

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New Mortgage Rules

As I mentioned last week, the start of the Olympic Games would make it difficult for me to post on a daily basis and that's exactly what has happened. I have lots more Olympic pics for you, but I may stick them on a subsite and reference the link here.

The main news today is the new mortgage rules that the Canadian Finance Minister came out with.

In a nutshell (1) all borrowers must meet 5 year fixed rate standards instead of the previous standard of 3 years, (2) limit refinancing to 90% vs 95% of a home's value, and (3) require 20% down for speculative/investment mortgages that require CMHC insurance.

Comically Finance Minister Jim Flaherty said he is responding to growing concerns that Canada's housing market is overheating, but stresses there is no bubble in Canada's real-estate market.

"There's no compelling evidence of a housing bubble, but we're taking proactive, prudent, measured and cautious steps today to help prevent a housing bubble."

Riiighhttt!

We have a housing bubble and the government is scrambling to find ways to tamper the fire without putting it out.

As for discouraging speculation by demanding that prospective homebuyers who want to purchase a property for rental purposes will have to come up with a 20% downpayment, instead of the current 5%, Economists are already noting that it will be difficult for lenders to determine on which side of the line buyers fall.

And the creation of a test threshould of meeting a 5 year fixed mortgage rate? All this change does is limit the size of the mortgage you are going to be able to get; it doesn't prevent people from buying homes, it doesn't drive a lot of new homebuyers out of the market and it doesn't lead to higher payments.

Currently you can get a 5 year fixed mortgage for 3.75%. What kind of test threshold is that?

The infamous stress tests conducted by the Bank of Canada released at the end of the year tested current Canadian mortgages at a 4.5% rate threshold and found that 10% of all Canadians would be severely stressed at this level.

It all comes down to interest rates.

And on that front events are moving very quickly with the PIIGS, Dubai and the global demand for money. More on that tomorrow.

I steadfastly maintain that events will push intrerest rates levels to the historic norm of 8.25% AT THE VERY LEAST!.

That rate is almost double the BOC stress test rate that places 10% of Canadians in 'severe distress'. Recall that one morgage broker considers 8% to be a 'doomsday scenario'.

These are the same brokers, btw, who rationalized that anyone who receives a 5% down/35 year amortization mortgage "are getting them because they’re well qualified. It’s that simple."

Well... no it's not. And the fact that the Finance Minister's hand was forced into taking some sort of action proves that they are not well qualified.

But let's not kid ourselves. The new mortgage rules do nothing to address the dangerous and precarious position that a vast majority of current Canadian mortgage holders are already in.

When the global demand for capital pushes yields ever higher, the 'Canadian-housing-bubble-that-isn't' will trap all these Canadians and implode in spectacular fashion.

It's all about interest rates, and not the 5 year rates at a piddling 3.75% or 4.5%.

Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending.

Nice of you to finally admit that this exact problem already exits, Jimbo. The problem is... irresponsible lending has already created a collossal mess. And there is only one way that mess will be unwound.

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What a night!

What an evening last night in Dowtown Vancouver was. Above is the outdoor Olympic Cauldron by the Vancouver Convention Centre.

Unlike the faulty Cauldron during the Opening ceromonies, all four pillars on the outdoor Cauldron are present here.

People flooded the downtown core of the City last night with the streets still jam packed midnight. At 3:30am Granville Street was still alive with people and all the bus stops had 5 - 35 people at them.

Mark my words, should the hockey teams win Gold, especially the men's team, no one will give a damn about the closing ceremonies and downtown will erupt with hundreds of thousands of people.

Below is a picture of crowds singing an impromptu version of Oh Canada.

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It's time...

It's time.

All the wait. All the hype.

It's over and now it starts.

I cannot convey to you the unbelievable feeling that exists in Vancouver today.

There is a pride... a sense of patriotism that is so... un-canadian.

I hope I can bring you, through some pictures later this week, more of what is happening here.

For now, let the Games begin.

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Olympic Torch Relay comes to Vancouver City Hall

(click on image to enlarge)

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Molson Canadian Hockey House

This will be the high temple of hockey for those who can't get tickets to the actual games. I believe it seats over 3,000, has 65,000 square feet of club, dining and entertainment areas. There are numerous giant high-def screens and has a VIP section.

As I said, media is everywhere. Here Canada's Sportsnet channel is doing an interview...

Here CTV is interviewing Tyler Stewart of the Canadian band Barenaked Ladies...

Former Vancouver Canuck Captain Stan Smyl (right) and some guy I don't know...

The VIP section...

And there are police on loan from all over the country in Vancouver for this. Here we have an officer from the Ontario Provincial Police and Hamilton Police...

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Robson Centre Plaza Zipline

A friend sent along these photos to share with the blog. High above Robson Centre is a ride that is open to the public called the 'Zipline'. You climb one of the towers to a preparation area. You get hooked up in a harness and then your harness is attached to the cables strung across the Plaza. Then, away you go...

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A few more pics from last night...

One of the big attractions at Live City Yaletown is going to be a water/laser light show. Huge plumes of water are shot in the air and laser images are projected onto them. I first saw this effect demonstrated at Disneyland and it makes for an impressive show.

Another media shot for you. As the crowds left the 2nd Dress Rehearsal for the Opening Ceremonies, many members of the crowd funneled across the pedestrian walkway over the west side parking lot onto the Cambie Bridge...

Waiting for them were this Asian TV crew (whose reporter spoke perfect English) They were trying to find out details of what was going to go on tomorrow, particularly with the indoor fireworks in BC Place. The reporter asked a young boy what his favourite thing was? "Fireworks" he gushed. And almost immediately everyone passing by hushed "Ssshhhhh, it's a secret." I do know there are plans for extensive fireworks outside, on the rim of the stadium as well. These were visible at Monday's Dress Rehearsal #1, but not last night.

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More Olympic Photos

Well, as you can see by the countdown clock above there is only a day and a bit to go before the Olympics are here. Lots of pics from Wednesday for you. It was the 2nd Dress Rehearsal today for the Opening Ceremonies and Vancouver did not disappoint as it pissed rain on the attendees.

As you can see in this next photo, the Olympics are most certainly grouped according to class. There are the entrances for the common folk. Then the Olympic 'Family' (meaning VIPs) have their own private entrances.

This next photo was taken on Tuesday and shows one of the Live City sites. These are free celebrations put on by the City of Vancouver. This first one is by the near the Vancouver Post office...

And the second one is down on the water in Yaletown. There will be some evening pictures of this in a moment...

Inside Live City Yaletown is the Samsung Pavilion which opened Wednesday...

Numerous dignitaries were on hand. Here the Premier of British Columbia, Gordon Campbell, is shown (scarf and silver hair).

In this next pic, on the far left is the head of the Vancouver Organizing Committee John Furlong. Next to him is Jacques Rogge, head of the International Olympic Committee...

Even Wayne Gretzky made an appearance...

The entrances to all the outdoor celebrations have their own stringent security too. Here, at the Live City Yaletown entrance you can see the airport style metal detectors everyone must pass though - even for free events...

At night, Live City Yaletown has it's own set of spotlights to compete with the Vector Lightshow by the Burrard Bridge I showed you the other day...

Speaking of the Vector Lightshow, the cloudy night (the rain had mercifully stopped) made a spooky canvas for the spotlights above the downtown hi-rises...

There is a ton of the world's media on hand. You can't walk very far without seeing media somewhere. It's not a great picture, but this is Bob Costas from NBC Sports...

Not sure who this dude is, but I was walking past the Opus hotel's Elixir Restaurant and I spied him doing a broadcast...

Stopped to chat with this pair just above the Robson Street outdoor ice rink. They are from San Francisco...

At the other end of Robson Street is where Global TV is set up. That's local sportscaster Squire Barnes getting ready for his airtime...

And as if traffic wasn't f*cked up enough, CTV has got their local onsite broadcast booth set up in two west bound lanes of traffic on Robson Street just before Burrard...

Stopped and chatted with this crew. They are from South Korea...

A portent of things to come? This is the new Canada Line Skytrain station in Yaletown after the Dress Rehearsal ended. Normally people would enter the station in the front. There are so many people at this one station that staff is blocking the entrance and having the people loop around the station and enter on the side. The line up will snake down Davie towards Pacific Boulevard. And this after only a rehearsal with 30,000 attendees...

It's awesome to see the city getting swept up in the excitement. Here one balcony has the rings on display (wonder if VANOC will be knocking on their door soon?). Restaurants all over are also festooned with Canadian flags...

This is Irish House...

And the Art Gallery is draped with these oddly Hawaiian canvases. A subliminal message about all the warm rain in the Spring... er... Winter Olympics perhaps?

The steps of Robson Square have these neat stickers which form a mural from a distance...

Now... had to show you this. Enlarge the pic and read the writing on the window and you will see that some clown is apparently going to live in the Urban Barn 24/7 and be on display during the Olympics. I wonder if he likes to lounge around in the nude after store hours?

The entertainment district on Granville street is finished it's makeover and is decorated with lighted poles. It looks impressive...

Granville Street north of Robson has been taken over by a collection of bizzare street art including lantern trees, lighted totem poles and generally weird stuff...

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